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PIIGS and a Spurious Correlation.

by Ronald Rutherford Thu Feb 25th, 2010 at 05:27:05 PM EST

There seems to be a lot of talk around her about PIIGS as in the thread already started called: PIIGS to the Slaughter, by Richard Lyon which I have not begun to even start on the thread, but I wish to present another perspective... Instead of trying to correct all the disparancies in the HTML versions I only include the introduction as Lyon suggested. Full post at: PIIGS and a Spurious Correlation.

In this post I want to discuss some of the important issues the European Union is facing. Many of these problems have come to the surface with the mounting fiscal crisis in Greece and more broadly the PIIGS. PIIGS stand for the countries of Portugal, Italy, Ireland, Greece and Spain. The Economist magazine provides some basic facts about each countries debt and what steps have been taken to address the issues at FACTBOX-Eurozone's embattled fringe PIIGS economies which includes a link to the following chart.
{Continued at:Rutherfordian-Economics: PIIGS and a Spurious Correlation.}


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Let me at least provide some kind words from another:
That is an interesting diary. It does a nice job of pulling together several issues that are tied to the more general matter of EU financial problems. Might I suggest that you do a simple diary here with a link to that diary. I think it deserves more attention and discussion than it might get by being buried at the end of what has developed into a complicated brier patch of multiple topics.
here


Rutherfordian ------------------------------ RDRutherford
by Ronald Rutherford (rdrradio1 -at- msn -dot- com) on Thu Feb 25th, 2010 at 05:42:55 PM EST
I'm very glad you decided to follow my suggestion :)
by Richard Lyon (rllyon@gmail.com) on Thu Feb 25th, 2010 at 05:48:13 PM EST
[ Parent ]
Seeking Alpha provides three suggestions for Hedging PIIGS Risk with ETFs. The first is to directly purchase a CDS of the PIIGS. The spreads are now greater than the BRICS, which is simply amazing and maybe a signal that the market is expecting more shoes to drop.

"Simply amazing" is an understatement.  Both China and India are two bad harvests away from social disorder and they are a better risk than Greece?  

Doesn't make sense.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Thu Feb 25th, 2010 at 07:09:12 PM EST
Doesn't make sense.

Only together with the assumption that market prices have any predictive power.

the market is expecting more shoes to drop

No, the market is full of highly impressionable people.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Feb 25th, 2010 at 07:20:15 PM EST
[ Parent ]
Or perhaps "the market" contains actors with shoe collections to match Imelda Marcos and who have a fondness for dropping shoes.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 25th, 2010 at 10:41:20 PM EST
[ Parent ]
Maybe they can be used to replace credit default swaps.
by Richard Lyon (rllyon@gmail.com) on Thu Feb 25th, 2010 at 10:49:15 PM EST
[ Parent ]
it only makes sense if you remember that there's almost no middle class with a sense of entitlement in those countries, so workers are two a penny, and without protection from exploitation, ergo a better 'investment'.

greeks will not not just roll over and drink weedkiller, not after they've had a first world education. they are also less easy to distract and divide along religious lines in india's case, and in china the government acts as pimp for cheap labour, so...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Thu Feb 25th, 2010 at 08:52:50 PM EST
[ Parent ]
If you mean China and India they both have a rapidly emerging middle class. However, they probably still fairly insecure about their newly acquired comforts.
by Richard Lyon (rllyon@gmail.com) on Thu Feb 25th, 2010 at 09:32:30 PM EST
[ Parent ]
... having a middle class majority and are not on track to having a middle class majority, so its easy to imagine that they can always be bought off with a much smaller share of total product than in an EU nation.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Fri Feb 26th, 2010 at 04:37:58 PM EST
[ Parent ]
it only makes sense if you remember that there's almost no middle class with a sense of entitlement in those countries...

Upstate NY has noted that those with real security and a livable retirement in Greece are those who work for the government. As in the USA, they have the primo retirement and benefit plans. She also noted the penchant for the wealthy to avoid taxation in Greece, also a factor in the USA.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 25th, 2010 at 10:53:37 PM EST
[ Parent ]
So, perhaps conditions in the USA are converging with those in Greece.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Feb 26th, 2010 at 02:34:37 PM EST
[ Parent ]
California is the most persuasive case for that view.
by Richard Lyon (rllyon@gmail.com) on Fri Feb 26th, 2010 at 03:16:52 PM EST
[ Parent ]
Comment responses
Upstate NY has noted that those with real security and a livable retirement in Greece are those who work for the government. As in the USA, they have the primo retirement and benefit plans

in italy they are treated similarly, but they totally feel they deserve it, because their taxes are prededucted, so they have no recourse to dodging taxes.

the mutual envy between these two social/fiscal divisions, those who can diddle and those who can't, is a cause of much bile, and occasionally gets extremely virulently expressed.

i believe they take revenge for this by deliberately slowing down bureaucracies, just because they can.

to them most people who come for their services are the enemy.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Fri Feb 26th, 2010 at 02:42:03 PM EST
[ Parent ]
That's the true rot in all of this, when there are internal divisions.
by Upstate NY on Fri Feb 26th, 2010 at 06:46:27 PM EST
[ Parent ]
yes, much more easily papered over in flush times...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Sat Feb 27th, 2010 at 04:18:13 AM EST
[ Parent ]
This is true now.

However, pensions are being slashed, and wages in that sector are being cut.

If we're comparing Greece to the USA, it should be noted that Greece has a sad and paltry social security system. The pensions for civil service I've heard average around 700 euros a month. Social security is maybe a quarter of that.

But, the main thing you need to realize about Greece's totally bloated civil service that includes 30% of the workforce is that Greece has not yet privatized many of its state corporations, so included in that workforce is state airlines, ferries, dockworkers, transportation (i.e. trains and buses), telecommunications, energy, etc. I'm sure there are lots of unproductive workers in these sectors as well, but one might say that Greece's public workforce would drop overnight if these entities were privatized.

I'd also mention that, in this light, Greek civil service may be seen as a form of workfare, since the number on welfare (long term unemployed) is comparatively small in Greece, precisely because the safety net doesn't pay.

What the Greeks have done is entwined their safety net with the political system, so that you are beholden to politicians for your form of welfare. In the USA, by contrast the vast majority of people on welfare don't even vote.

by Upstate NY on Fri Feb 26th, 2010 at 06:45:34 PM EST
[ Parent ]
True indeed and one reason I said it was simply amazing. I was thinking more along the lines of Brazil social unrest and high inequality.

I do take exception {please in a small way} to so many people lumping China and India in the same boat. For example if savings rates is an indicator of security or lack thereof then the difference in the respective economies shines through.

Rutherfordian ------------------------------ RDRutherford

by Ronald Rutherford (rdrradio1 -at- msn -dot- com) on Fri Feb 26th, 2010 at 12:34:05 AM EST
[ Parent ]
See below the graph from The Ruferfordian showing self employment rates in the EU and the US:


I would note that large self employment is probably inversely correlated with degree of economic development. If one cannot find good paying work with an employer one can start their own business, even if it is not so prosperous. This is also one of the reasons for the surge in self employment in the USA since October '08.

I describe my own situation as one of being "self un-employed." Sadly, it does not qualify one for unemployment benefits.


"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 25th, 2010 at 11:12:44 PM EST
Interesting, I thought the OECD countries. Wonder why they then included Australia, New Zealand, and Japan in Figure 2 of the CEPR paper.
Someone from work suggested the inverse correlation with "economic development" but it appears you are using it in the sense of economic growth.

The only theory I can think of in development economics is something along Marx model of the artisan and handy-craft jobs being replaced by the capitalist system of wage labor. If you can expand upon what you are thinking it would be appreciated.

Sorry about your situation.

Rutherfordian ------------------------------ RDRutherford

by Ronald Rutherford (rdrradio1 -at- msn -dot- com) on Fri Feb 26th, 2010 at 02:10:53 AM EST
[ Parent ]
The comments down thread state at least as clearly as I could have stated the qualifications I might have put on "economic development". But my own thoughts ran to the advantages sole proprietorships have for minimizing or avoiding taxes, especially if they only hire "help" for cash. It also occurred to me that much of the Greek economy might be seen by non-Greek investors as offering too little return for their money, while wealthy Greeks might also still feel safer investing in Switzerland, the USA or...  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Feb 26th, 2010 at 11:41:39 AM EST
[ Parent ]
Ronald Rutherford:
I thought the OECD countries. Wonder why they then included Australia, New Zealand, and Japan in Figure 2 of the CEPR paper

Because AU, NZ, and Japan are OECD countries?

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Feb 26th, 2010 at 02:49:30 PM EST
[ Parent ]
And I believe that was my point, that it was beyond just EU and US. I also thought interesting that Japan was not included in graph 1.

Rutherfordian ------------------------------ RDRutherford
by Ronald Rutherford (rdrradio1 -at- msn -dot- com) on Fri Feb 26th, 2010 at 03:19:27 PM EST
[ Parent ]
You're right. Strange, possibly an error. The original OECD stats (country profiles) include Japan with a self-employment rate of 12.9% for 2007, so on a par with Australia in the middle of the chart.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Feb 26th, 2010 at 03:28:14 PM EST
[ Parent ]
Might we suspect that including Japan would spoil the intended effect of the graph? Just call them an outlier and omit them.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Feb 26th, 2010 at 04:30:44 PM EST
[ Parent ]
One anecdotal example I know of . . . thousands and thousands of owner-operator truck drivers.  They like to decorate their trucks, so they are easily distinguishable from the company-owned vehicles.
by Zwackus on Sun Feb 28th, 2010 at 04:22:23 PM EST
[ Parent ]
I would note that large self employment is probably inversely correlated with degree of economic development.

Self-employment has been the favoured way for policymakers to tell people "you're on your own" for the past 20 years at least. To the serious people, self-employment is probably a sign of a dynamic economy. After all, their mental model harkens back to Adam Smith's town-square market where everyone is "self-employed".

In Spain companies will offer people full-time work, but as self-employed contractors. That way the company shifts all of the social contributions to the worker.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 26th, 2010 at 04:53:58 AM EST
[ Parent ]
Agreed on the current drive towards self-employment - or perhaps rather internal outsourcing. But the statistics could very well also show differences in economic culture (has not northern Italy lots of family businesses?), regulation (inner city shops are more likely to be a family business then a supermarket is) as well as differences in production (easier to make wine then power plants yourself) and service/production share of economy (lots of services can be one person businesses).

So I think it would be difficult to compare countries and say something useful just based on self employment.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Feb 26th, 2010 at 09:02:56 AM EST
[ Parent ]
Agreed on the difficulty of comparison. Also, in countries where it is difficult to create a firm because of legal obstacles, self-employment can be an easy way to start a business.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Fri Feb 26th, 2010 at 09:04:38 AM EST
[ Parent ]
I read hints of structural rigidity in the EU from what you posters are stating. I have met others on-line that think self-employment is high because even hiring the first additional new employee is so fraught with legal complications that he prefers to only work as a single worker firm.

I hope that makes sense and someone might comment on that reluctance of even taking on additional help.

Rutherfordian ------------------------------ RDRutherford

by Ronald Rutherford (rdrradio1 -at- msn -dot- com) on Sat Feb 27th, 2010 at 12:00:47 PM EST
[ Parent ]
The EU is not a category from this point of view. Of which country(ies) did you hear online that... legal complications... etc?
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Feb 27th, 2010 at 12:15:23 PM EST
[ Parent ]
Is not the first step in becoming a EMU member is to be effectively under the EU and thus some regulations like employment have to be consistent with the rules and laws of the EU?

I believe more in the Germanic countries. So it may not even be relevant in this analysis. Just some thoughts.

Rutherfordian ------------------------------ RDRutherford

by Ronald Rutherford (rdrradio1 -at- msn -dot- com) on Sat Feb 27th, 2010 at 03:26:28 PM EST
[ Parent ]
Labour regulations are among the elements member states hold on to. The amount of administrative complication in hiring someone is thus a function of the country you're considering.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Feb 27th, 2010 at 03:30:42 PM EST
[ Parent ]
self-employment is high because even hiring the first additional new employee is so fraught with legal complications that he prefers to only work as a single worker firm.

No, firms will offer people employment on condition that they do it as self-employed, for the sole purpose of saving on social security contributions and ease of firing. I do not believe for a minute a potential hire would voluntarily choose to be self employed rather than be on payroll.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Sat Feb 27th, 2010 at 12:57:15 PM EST
[ Parent ]
The point I was trying to stress was that there are quite a few disincentives to grow a business and as such this could show up in the data as self-employment and small businesses not growing as fast and thus not becoming large corporations eventually.

Incentives and disincentives work and are significant.

Rutherfordian ------------------------------ RDRutherford

by Ronald Rutherford (rdrradio1 -at- msn -dot- com) on Sat Feb 27th, 2010 at 03:21:48 PM EST
[ Parent ]
From experience - so this is not data ;) - I have seen independent craftsmen or farmers calculate whether they can afford to hire someone (this is in France), or how much extra work they would have to hustle for to make the hiring a financially reasonable proposition. In other words, working out the perspectives for their business in a rational way. And sometimes choosing to stay small, ie self-employed (which is what I think you're getting at).

The criterion is if it's worthwhile taking an employee on, if the business's turnover will grow by more than the employee's wages + payroll taxes and contributions. But not the paperwork or administrative obstacles (though these do take up some time and attention).

by afew (afew(a in a circle)eurotrib_dot_com) on Sat Feb 27th, 2010 at 03:42:16 PM EST
[ Parent ]
Is growing a business and becoming a large corporation the be-all and end-all of business?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Sat Feb 27th, 2010 at 04:20:21 PM EST
[ Parent ]
I'd like to see self-employment as a proportion of private sector employment in that graph as well.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Fri Feb 26th, 2010 at 01:51:32 PM EST
[ Parent ]
The chart reflects the importance of traditional one-man activities (small farmer, fisherman, craftsman, shopkeeper) in the top raters on the list.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Feb 26th, 2010 at 03:08:02 PM EST
[ Parent ]
Might these all be simple classification statistics? In one country, you might have a tree cutting service who contracts with each worker, and that workers is considered self-employed, whereas in another country, the tree cutter would be considered the employer.

A better measure for me would be small business to big business.

by Upstate NY on Fri Feb 26th, 2010 at 06:57:22 PM EST
[ Parent ]
But it's not a matter of consideration, it's a matter of law. Either you are an officially self-employed treecutter, or you are a hired employee.

The greater the degree of integration into bigger-capital structures in an activity, the greater the number of wage-earners, and the lesser that of independent workers. In still-agrarian economies, there are more independent small (peasants, woodsmen, fishermen, etc). Who become wage-earners as economic development and concentration of capital progress.

An interesting example is that of France, widely considered as a land of small peasant farmers, but low on the OECD table above. In fact there are practically no small peasants left in France. Increasing capital requirements in farming have cleared them out, leaving only kulaks (who are clearing each other out for the same reason).

by afew (afew(a in a circle)eurotrib_dot_com) on Sat Feb 27th, 2010 at 04:07:46 AM EST
[ Parent ]
I'm not getting it, for some reason. I understand your macroeconomic point, but your either/or statement in your second sentence does mean there is an issue of classification.

Contractual practices in some nations are different from others. So, on the macroeconomic level, we can see that Greece does not have mega corporate entities, but it would still help to see how small businesses correlate to larger ones, simply because this give a picture that we can compare easier.

In the USA, we have a massive amount of temps who are contractual workers. Are they self-employed?

by Upstate NY on Sat Feb 27th, 2010 at 10:28:25 AM EST
[ Parent ]
There may be differences between countries, but, to take the example of temp workers: you may be employed by a temp agency and placed in a temp job; or directly hired for a specified contractual period by the company that needs the work done. In those two cases, you're a wage-earner and there are payroll taxes (social contributions, benefit schemes) to pay for the employer, and paperwork to go with that. Or you are self-employed and you bill the company for a fee for your work (contractually agreed). The employer doesn't have payroll taxes to meet, you deal with your social contributions (pensions, etc) yourself, along with the paperwork.

That is legally and administratively more sharply defined than just statistical classification after the fact.

The CEPR paper does go on to compare (as far as there are comparable stats) small and larger businesses in manufacturing. Where it appears that 35% of manufacturing employees in Greece work in businesses of less than 20 employees, while the comparable figure in the US is 11%; when the ceiling is set at 500 employees, that covers 75% of Greek manufacturing employment, while only 51% in the US (ie nearly half of US manufacturing employment is in companies of over 500 employees).

by afew (afew(a in a circle)eurotrib_dot_com) on Sat Feb 27th, 2010 at 11:33:02 AM EST
[ Parent ]
Thanks for the stats. Interesting.
by Upstate NY on Sat Feb 27th, 2010 at 11:53:34 AM EST
[ Parent ]
The CEPR paper does go on to compare (as far as there are comparable stats) small and larger businesses in manufacturing. Where it appears that 35% of manufacturing employees in Greece work in businesses of less than 20 employees, while the comparable figure in the US is 11%; when the ceiling is set at 500 employees, that covers 75% of Greek manufacturing employment, while only 51% in the US (ie nearly half of US manufacturing employment is in companies of over 500 employees).

That may be a function of the size of the country, though.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Sat Feb 27th, 2010 at 12:59:00 PM EST
[ Parent ]
Quite. One would not expect a small country to have a lot of >500-employee firms.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Feb 27th, 2010 at 02:01:45 PM EST
[ Parent ]
Pardon me. I have some academic experience with these classification problems.

First, firm size. OECD data analyses are often problematic because of member reporting by class, small-, medium- and large firms in any given industry. Classification varies, for example, a small-sized firm may be one that employs full-time equivalents (FTEs), 1-25 or 1-100; a medium-sized firm population range may be 26 - 500 or 101 - 5,000; a large-sized firm population range may be any number > 500 or > 5,000, i.e. otherwise unspecified. Each OECD member reports firm population by class. You will find in review of the literature, an OECD economist then decides how best to qualify further --signified by "description of" or "transformation of" or "harmonization of"-- data sets for a particular analytic purpose, e.g. investment or output by firm class by geographic area.

AFAIK, BLS stopped collecting and publishing firm size distribution in 2005. I assume, whatever information the agency reports to OECD are estimates, derived perhaps from B/D modeling and MoM establishment and HH surveys.

Second, employee classes. Salaried persons are employees, where an employer claims exclusive use of and compensation for labor by contract. Part-time workers are capital expenses and may or not be included in reported firm census data unless as in FTE (hours), depending on member methodology. AFAIK, OECD members report, under separate cover, part-time worker population and characteristics collected from HH census.

"Temps" or part-time workers or "contractors" (individuals NOT firms) are self-employed. Contract terms of temporary employment are irrelevant to the fundamental relationship between buyer and seller, i.e. non-exclusive compensation for labor. In the US, as you know, self-employed persons (sellers) are differentiated from salaried and wage earners by format of income reporting by employers (buyers) to the IRS: 1099 and W2, respectively.

Some "full-service" temp agencies function like brokers, collecting mark-up per hour per person placed with its employer-clients in exchange for automated tax withholding and income disbursements to employee-clients.

The IRS may publish a data series of 1099s derived from all returns history. I don't know.

Diversity is the key to economic and political evolution.

by Cat on Sat Feb 27th, 2010 at 11:59:50 AM EST
[ Parent ]


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